One person has an abso lute advantage over another if he or she takes fewer hours to perform a task than the other person.
Total planned spending on final goods and services.
Shows the relationship between aggregate demand and inflation; because short-run equilibrium output equals aggregate demand, the aggregate demand curve also shows the relationship between short-run equilibrium output and inflation; increases in inflation reduce aggregate demand and short-run eq uilibrium output, so the aggregate demand curve is downward-sloping.
Either an inflation shock or a shock to potentia l output; adverse aggregate supply shocks of both types reduce output and increase inflation.
The adding up of individual economic variables to obtain economywide totals.
An increase in the value of a currency relative to other currencies.
Anything of value that one owns.
Any combination of goods that can be produced using currently avai lable resources.
A situation in which a country is economically selfsufficient.
Provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines.
The portion of aggregate demand that is determined outside the model.
Total benefit of undertaking n units of an activity divided by n.
Total cost of undertaking n units of an activity divided by n.
Output per employed worker.
The net decline in a country's stock of international reserves over a year.
The net increase in a country's stock of international reserves over a year.
Cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments.
An episode in which depositors, spurred by news or rumors of the imminent bankruptcy of one or more banks, rush to withdraw their deposits from the banking system.
The direct trade of goods or services for other goods or services.
Saving done for the purpose of leaving an inheritance.
The leadership of the Fed, consisting of seven governors appointed by the President to staggered 14-year terms.
A legal promise to repay a debt, usually including both the principal amount and regular interest payments.
A particularly strong and protracted expansion.
Increases in the value of existing assets.
A long-lived good, which is itself produced and used to produce other goods and services.
Purchases of domestic assets by foreign households and firms.
Decreases in the values of existing assets.
Purchases of foreign assets by domestic households and firms.
A shift of the entire demand curve.
A shift of the entire supply curve.
A movement along the demand curve that occurs in response to a change in price.
A movement along the supply curve that occurs in response to a change in price.
An economy that does not trade with the rest of the world.
One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost.
Two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other.
The payment of interest not only on the original deposit but on all previously accumulated interest.
A quantity that is fixed in value.Â
For any period, measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year.
Spending by households on goods and services, such as food, clothing, and entertainment.
The re lationship between consumption spending and its determinants, such as disposable (after-tax) income.
The combinations of goods and services that a country's citizens might feasib ly consume.
See Recession.
An increase in interest rates by the Fed, made with the intention of reducing an expansionary gap; also known as monetary tightening.
Regular interest payments made to the bondholder.
The interest rate promised when a bond is issued.
The tendency of increased government deficits to reduce investment spending.
The extra unemployment that occurs during periods of recession.
The process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms.
A situation in which the prices of most goods and services are falling over time so that inflation is negative.
A curve or schedu le showing the total quantity of a good that bu yers wish to buy at each price.
The amount of wealth an individual or firm chooses to hold in the form of money.
A variable in an equation whose va lue is determined by the value taken by another variable in the equation.
A system under which the government guarantees that depositors wi ll not lose any money even if their bank goes bankrupt.
A decrease in the value of a currency relative to other currencies.
A particularly severe or protracted recession.Â
A reduction in the official value of a currency (in a fixed-exchange-rate system).
If the amount of labor and other inp uts employed is held constant, then the greater the amount of capital already in use, the less an additional unit of capital adds to production.
If the amount of capital and other inputs in use is held constant, then the greater the quantity of labor already employed, the less each additional worker adds to production.
The interest rate that the Fed charges commercial banks to borrow reserves.
The lending of reserves by the Federal Reserve to commercial banks.
A substantial reduction in the rate of inflation.
The practice of spreading one's wealth over a variety of different financial investments to reduce overall risk.
A regular payment received by stockholders for each share that they own.
The length of an unemployment spell.Â
People who say they would like to have a job but have not made an effort to find one in the past 4 weeks.
The economic surplus from taking any action is the benefit of taking the action minus its cost.
The study of how people make choices under conditions of scarcity and of the results of those choices for society.
Condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels.
Any combination of goods for which currently available resources do not allow an increase in the production of one good without a red uction in the production of the other.
People who create new economic enterprises.
A mathematical expression that describes the relationship between two or more variables.
A stable, balanced, or unchanging situation in which all forces at work within a system are ca nceled by others.
See Fundamental value of the exchange rate.
The price and quantity of a good at the intersection of the supply and demand curves for the good.
The difference between the quantity supplied and the quantity demanded when the price of a good lies below the equilibrium price; buyers are dissatisfied when there is excess demand.
The difference between the quantity supplied and the quantity demanded when the price of a good exceeds the equilibrium price; sel lers are dissatisfied when there is excess supply.
A period in which the economy is growing at a rate significantly above normal.
A negative output gap, which occurs when actual output is higher than potential output.
A reduction in interest rates by the Fed, made with the intention of reducing a recessionary gap; also known as monetary easing.
The interest rate that commercial banks charge each other for very short-term (usually overnight) loans; because the Fed frequently sets its policy in the form of a target for the federal funds rate, this rate is closely watched in financial markets.
The committee that makes decisions concerning monetary policy.
The central bank of the United States; also called the Fed.
Goods or services consumed by the ultimate user; because they are the end products of the prod uction process, they are counted as part of GDP.
Firms that extend credit to borrowers using funds raised from savers.
Decisions that determine the government's budget, including the amount and composition of government expenditures and government revenues.
The tendency for nominal interest rates to be high when inflation is high and low when inflation is low.
A cost that does not vary with the level of an activity.
An exchange rate whose va lue is set by official government policy.
An exchange rate whose va lue is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market.
A measure that is defined per unit of time.Â
The market on which currencies of various nations are traded for one anoth er.
A banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100 percent.
The short-term unemployment associated with the process of matching workers with jobs.
The exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market.
The excess of government spending over tax collections (G - T).
The excess of government tax collections over government spending (T - G); the government budget surplus equa ls public saving.
Purchases by federa l, state, and local governments of final goods and services; government purchases do not include transfer payments, which are payments made by the government in return for which no current goods or services are received, nor do they include interest paid on the government debt.
The market va lue of the final goods and services produced in a country during a given period.
A situation in which the inflation rate is extremely high.
The effect of a one-unit increase in autonomous aggregate demand on short-run equilibrium output.
A variable in an equation whose value determines the value taken by another variable in the equation.
The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index. Indexing prevents the purchasing power of the nominal quantity from being eroded by inflation.Â
The portion of aggregate demand that is determined within the model.
Any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other.
A good whose demand curve shifts leftward when the incomes of buyers increase.
A sudden change in the normal behavior of inflation, unrelated to the nation's output gap.
Goods or services used up in the production of final goods and services and therefore not counted as part of GDP.
Purchases or sales of real and financial assets across international borders.
Foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market.
Spending by firms on fina l goods and services, primarily capital goods and housing.
The total number of employed and unemployed people in the economy.
If transportation costs are relatively small, the price of an internationally traded commodity must be the same in all locations.
The debts one owes.
Saving to meet long-term objectives, such as retirement, college attendance, or the purchase of a home.
A vertical line showing the economy's potential output Y*.
A situation in which actual output equals potential output and the inflation rate is stable; graphica ll y, long-run equilibrium occurs when the AD curve, the SRAS line, and the LRAS line all intersect at a single point.
Sum of currency outstanding and ba lances held in checking accounts.
All the assets in Ml plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or checks.Â
Government actions designed to affect the performance of the economy as a whole.
The study of the performance of national economies and the policies that governments use to try to improve that performance.
The marginal benefit of an activity is the increase in total benefit that results from carrying out one additional unit of the activity.
The marginal cost of an activity is the increase in total cost that resu lts from carrying out one additional unit of the activity.
The amount by which consumption rises when disposable income rises by $1; we assume that O < MPC < 1.
The market for any good consists of all buyers or sellers of that good.
Occurs when all buyers and sellers are satisfied with their respective quantities at the market price.
An asset used in purchasing goods and services.
The costs of changing prices.Â
The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets.
Determination of the nation's money supply.
Any asset that can be used in making purchases.
Relates the aggregate quantity of money demanded M to the nominal interest rate i; beca use an increase in the nominal interest rate increases the opportunity cost of holding money, which reduces the quantity of money demanded, the money demand curve slopes down.
See Income-expenditure multiplier.
A fin a ncial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide va riety of fin ancial assets.
The saving of the entire economy, equal to GDP less consumpti on expenditures and government purchases of goods and services, or Y - C - G.
The part of the total unemployment rate that is a ttributable to frictional and structural unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment is zero, so the economy has neither a recessionary nor an expansionary output gap.
Exports minus imports.
The rate at which two currencies can be traded for each other.
A measure of GDP in which the quantities produced are va lued at current-year prices; nominal GDP measures the current dollar value of production.
The annual percentage increase in the nominal value of a financial asset; also known as the market interest rate.
A quantity that is measured in terms of its current dollar value.
A good whose demand curve shifts rightward when the incomes of buyers increase.
Addresses the ques tion of whether a policy should be used; normative analys is inevitably involves the values of the person doing the analysis.
States that each extra percentage point of cyclical unemployment is associated with about a 2 percentage point increase in the output gap, measured in relation to potential output.
A situation in which banks' reserves equal 100 percent of their deposits.
An economy that trades with other countries.
Open-market purchases and openmarket sales.
The purchase of government bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply.
The sale by the Fed of government bonds to the public for the purpose of reducing bank reserves and the money supply.
The opportuni ty cost of an activity is the value of the next-best alternative that must be forgone to undertake the activity.
The difference between the economy's potential output and its actual output at a point in time.
An exchange rate that has an officially fixed value greater than its fundamental value.
The percentage of the working-age population in the labor force (that is, the percentage that is either employed or looking for work).
The beginning of a recess ion, the high point of economic activity prior to a downturnÂ
Describes how the action a policymaker takes depends on the state of the economy.
The decision about the forms in which to hold one's wealth.
Addresses the economic consequences of a particular event or policy, not whether those consequences are desirable.
The amount of output (real GDP) that an economy can produce when usi ng its resources, such as capital and labor, at normal rates; also known as potential GDP or full-employment output.
Saving for protection against unexpected setbacks, such as the loss of a job or a medical emergency.
A maximum allowa ble price, specified by law.
A measure of the average price of a given class of goods or services relative to the price of the same goods and se rvices in a base year.
A measure of the overa ll level of prices at a particular point in time as measured by a price index such as the CPI.
The amount originally lent.
The saving of the private sector of the economy is equal to the after- tax income of the private sector minus consumption expenditures (Y - T - C); private saving can be further broken down into household saving and business saving.
A graph that describes the maximum amount of one good th at can be produced for every possible level of production of the other good.
The view that free trade is injurious and should be restricted.
The saving of the government sector is equal to net tax payments minus government purchases (T - G) .
The theory that nominal exchange rates are determined as necessary for the law of one price to hold.
A legal limit on the quantity of a good that may be imported.
The annual percentage rate of change in the price level, as measured, for example, by the CPI.
Someone with well-defin ed goals who tries to fulfill those goals as best he or she can.
The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.
A measure of GDP in which the quantities produced are va lued at the prices in a base year rather than at current prices; real GDP measures the actu al physical volume of production.
The annual percentage increase in the purchasing power of a financial asset; the real interest rate on any asset equals the nominal interest race on chat asset minus the inflation rate.
A quantity that is measured in physical terms for example, in terms of quantities of goods and se rvices.
The wage paid to workers measured in terms of real purchasing power; the real wage for any given period is calculated by dividing the nominal (dollar) wage by the CPI for that period.
A period in which the economy is growing at a ra te significantly below normal.Â
A positive output gap, which occurs when potential output exceeds actua l output.
The price of a specific good or service in comparison to the prices of other goods and services.
The highest price someone is willing to pay to obta in any good or service, or the lowest payment someone would accept for giving up a good or perfo rming a service.
Set by the Fed, the minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain.
Bank reserves divided by deposits.Â
An increase in the official va lue of a currency (in a fixed-exchange-rate system).
The rare of recurn th at financia l investors require to hold risky assets minus the rate of return on safe assets.
Current income minus spending on current needs.
Saving divided by income.
See Excess demand.
A horizontal line showing the current rate of infl ation, as determin ed by past expectations and pricing decisions.
A situation in which inflation equals the va lue determined by past expectations and pricing decisions, and output equals the level of short-run equilibrium output that is consistent with that inflation rate; graphically, short-run equilibrium occurs at the intersection of the AD curve and the SRAS line.
The level of output at which output Y equals aggregate demand AD; the level of output that prevails during the period in which prices are predetermined.
Technological change that affects the marginal products of higher-skilled workers differently from those of lower-skilled workers.
In a straight line, the ratio of the vertica l distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run).
The socially optimal quantity of a good is the quantity that results in the maximum possible economic surplus from producing and consuming the good.
A massive selling of domestic currency assets by financi al investors.
Government policies that are used to affect aggregate demand, with the objective of eliminating output gaps.
A measure th at is defined at a point in time.Â
A claim to partial ownership of a firm.
An asset that serves as a means of holding wealth.
Government policies aimed at changing the underlying structure, or institutions, of the nation's economy.
The long-term and chronic unemployment that exists even when the economy is producing at a normal rate.
Two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other.
A cost that is beyond recovery at the moment a decision must be made.
A curve or schedule showing the total quantity of a good that sellers wish to sell at each price.
See Excess supply.
A tax imposed on an imported good.
The fact that a given dollar amount today is equivalent to a larger dollar amount in the future, because the money can be inves ted in an interest-bearing account in the meantime.
The va lue of a country's exports less the va lue of its imports in a particular period (quarter or year).
When imports exceed exports, the difference between the va lue of a country's imports and the va lue of its exports in a given period.
When exports exceed imports, the difference between the va lue of a country's exports and the va lue of its imports in a given period.
Payments the government makes to the public for which it receives no current goods or services in return.
The end of a recession, the low point of economic activity prior to a recovery.
Any combination of goods that cannot be produced using currently available resources.
An exchange rate that has an officially fixed va lue less than its fundamental va lue.
The number of unemployed people divided by the labor force.
A period during which an ind ividual is continuously unemployed.
A basic measure of economic value.
For any firm, the market value of its product or service minus the cost of inputs purchased from other firms.
A quantity that is free to take a range of different values.
A cost that varies with the level of an acti vity.
The va lue taken by the dependent variable when the independent variable equals zero.
The value of assets minus liabilities.
The movement of workers between jobs, firms, and industries.
The price at which a good or service is traded on international markets.